Editor's Note:
Here is some food for thought from regular contributor and Mobile Appraising Training Package author,
Dustin Harris. His suggestion makes sense from a valuation perspective and also
might release some of the pressure on appraisers to "hit the number." The
OREP/WRE Appraiser Independence Survey has over 1,000 respondents and
hundreds of comments. We will share the results in the following weeks. You can
participate here.
Why Value is Not an Exact Number by Dustin Harris, the
"Appraiser Coach"
By making the choice to do lender work, we also make the choice to accept some
pretty ridiculous stipulations. "When you pick up one end of the stick, you also
pick up the other," my dad used to teach me. One of those requirements that have
been around as long as I can remember is that an appraisal value must be
reported as a single dollar amount. This, I believe, is a mistake. Here’s why.
By definition, market value is: "The most probable price which a property should
bring in a competitive and open market under all conditions requisite to a fair
sale, the buyer and seller, each acting prudently, knowledgeably and assuming
the price is not affected by undue stimulus." (Fannie Mae).
"Probable" indicates flexibility and, I don't know about you, but my opinion is
rarely black and white (especially when it comes to appraised value). Our job is
to look at the market abstractly and determine the most probable price in which
a particular property might sell given certain parameters; sounds pretty grey to
me. Are you telling me that the house you just appraised for $210,000 could not
sell for $207,000 or $211,000? Of course
not. Yet, we are required to place our opinion of value into a small, "if it
fits, it ships" sized package.
Changing this policy would not only benefit the appraiser but more importantly
would assist the lender as it makes the loan decision. Here's how.
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Better for Appraisers Any appraiser who has been in this game for more than three
minutes understands the flaw that is inherent in pinning down the value to an
exact number. Our job consists of looking at 'comparable' homes, making
adjustments for the differences, reconciling those differences, and determining
the most probable value for that subject. There is grey in what is comparable.
There is grey in what the adjustments should be.
There
is grey in how each of us reconcile. Thus, there is grey in the final value
determination. Any sane person would say that two appraisers, given the same
ability to inspect, analyze, retrieve data, and finalize a number would
reasonably conclude a value within a five percent variance with one another.
That would not be considered unreasonable at all.
I
have been a residential appraiser for nearly two decades. For almost 20 years, I
have been giving my opinion of value. I have literally given thousands and
thousands of values. I can count on one hand the number of times that I have
been really, really confident on the dollar amount I reported. Sad but true.
When we look at the sales comparison approach, no two houses are identical (even
townhouses or condos in the same project are different in minor ways). The
circumstances surrounding the sales process are also different. Thus, it is rare
when all sales adjust to the same dollar amount. A better, more accurate measure
of value for our subject would be to look at a range of value. I think most
appraisers would agree that reporting a property as being worth between $88,000
and $96,000 is more honest than saying that same property is worth $92,000
(nothing more, nothing less). Certainly, it is feasible that the house could
still sell for $85,000 or even $100,000, but the chances are far greater that
your value is accurate using a range than a pin point.
Of
course, this concept cannot be taken too far, either. Saying a duplex is worth
somewhere between $100,000 and $400,000 may technically be correct, but it is
not very helpful to the collateral lending process. The value range should be
reflected by the adjusted comparables and weight given to the MOST comparable
sales as we do already.
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Better for Lenders
Selling this concept to appraisers is not difficult. Each of us would agree that
a step to reduce our liability and exposure is a step in the right direction.
But what about our clients? Would they
also benefit from such a practice? After all, it is they who must determine our
assignment conditions. I would argue that this policy change would be a huge
benefit to lenders in making more accurate loan decisions. Incidentally, it
would also benefit real estate agents, judges, IRS agents, and almost any other
intended user of appraisal reports.
When a bank makes a lending decision, there are many pieces to the pie that must
be looked at. Appraised value of the asset is only one of them. They scrutinize
work history, current debt, credit score, debt to loan ratios, and a host of
other determinants. Though there are stringent rules (imposed both legally and
in-house), there is also some flexibility within the process. In the end, the
lender is trying to make a decision that will be in the best interest of their
company. Would this particular mortgage be a good investment for our bank? By
having a range of values that the asset will likely sell for on the open market,
the decision maker is able to use better judgment in determining the viability
of the loan on a case-by-case basis.
The current, ridged rules make for bad decisions. People who probably should get
loans do not, and as we have seen in recent years, people who should not have
gotten loans, do. Under conventional regulations there often is a cutoff point.
Using all the other determinants, there is a dollar amount that the property
must be valued at before a loan can be approved. Appraisers do not (and arguably
should not) know that amount. What that means is, if the magical number is
$235,000, and the appraisal comes in at $234,000, the loan may be dead for an
otherwise solid creditor. Again, that property is likely worth between $229,000
and $239,000, but the loan is dead because the appraiser put down the number of
$234,000.
Wouldn't it be better for the lender to be able to look at the decision in a
holistic way rather than a finite manner? I can see this scenario playing out in
the smoky, back rooms where 'evil bankers' make their decisions: "Well, the
asset needs to be worth $174,000 in order for us to make this loan. The
appraised value is between $172,000 and $178,000. Looking at their credit score
and payment history, they are solid. The loan is approved!" Or this: "Though the
asset falls into the appraised value range, these guys just do not seem to have
it together in other aspects. I think we better deny this one, Jack." It allows
us to move, ever so slightly, back to the way banking used to be in the small
towns of America. Bankers made lending decisions based on good business sense
rather than the arbitrary numbers all lining up.
Conclusion When it is allowed, I have been giving a value range on private
appraisal assignments for many years. If someone orders an appraisal from me for
the purpose of wanting to know where they should list for a possible sale, for
example, I give them a range. I think that is only fair. It is certainly more
accurate.
For the past year or so, I have also been giving a range of value on the
appraisals I do for lending purposes. Oh, I will play FNMA's game and give an
exact value on page two, but my CYA (cover your assets) will be a range of
values on page three. I would feel much more comfortable before a judge and jury
defending a value range than trying to prove an exact dollar amount.
Now, go create some value!
About the Author
Dustin Harris is a multi-business owner, but he has found most of his success as
a self-employed, residential real estate appraiser. He has been appraising for
nearly two decades. He is the owner and President of Appraisal Precision and
Consulting Group, Inc., and is a popular author, speaker and consultant. He owns
and operates The Appraiser Coach where he personally advises and mentors other
appraisers helping them to also run successful appraisal companies and increase
their net worth. His two-day workshop will be held on Oct. 7-8, 2013 in Salt
Lake City. His principles and methodologies are also taught in an online,
Mastermind
group.
He and his wife reside in Idaho with their four children.
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